By Chris Reese and Luciana Lopez NEW YORK, July 2 (Reuters) - U.S. Treasury debt pricesgained on Monday as investors fretted that unexpectedly weakU.S. manufacturing data and doubts about a European deal to easethe region's debt crisis signaled stalling global growth. Treasury prices extended gains after data showed the U.S.manufacturing sector contracted in June for the first time sinceJuly 2009, with 30-year bond prices over a point higher. "It's weighed on equities, and it's sent money flooding backinto Treasuries," said Kim Rupert, managing director of globalfixed income analysis at Action Economics in San Francisco. But trading was on the thin side, she said, as many traderstook a long weekend ahead of the July 4th holiday on Wednesday. The U.S. factory data added to speculation the FederalReserve may do another round of asset purchases, known as QE3,which could perhaps be announced as soon as the central bank'snext policy meeting July 31 - Aug. 1. "There is a very good chance of QE3 at the August Fedmeeting," said Jacob Oubina, senior U.S. economist at RBCCapital Markets in New York. "The implication here is a verysoft second half of the year." Early in the day, Treasuries had firmed following purchasingmanagers surveys out of China, Japan, South Korea and Taiwanshowed slowing demand from importing centers such as Europe andthe United States in June. That took the shine off an agreement by European leaderslast week to let their rescue fund inject aid directly intostricken banks from next year and intervene in bond markets tosupport troubled members. In addition, Finland and the Netherlands cast doubts on thedeal, with the Finnish government telling parliament thatHelsinki and its Dutch allies would block the euro zone'spermanent bailout fund buying bonds in secondary markets.

Benchmark 10-year Treasury notes on Monday weretrading 18/32 higher in price to yield 1.582 percent, down from1.64 percent late Friday. Benchmark yields have been trading ina range of 1.56 percent to 1.73 percent since early June, afteryields hit a record low of 1.44 percent on June 1. The Institute for Supply Management said its index ofnational factory activity fell to 49.7 from 53.5 the monthbefore, missing expectations of 52.0, according to a Reuterspoll of economists, and below even the lowest forecast of 50.5. It was the first time since July 2009 that the index hasfallen below the 50 mark that indicates contraction.

While adding to worries over the pace of global growth, themanufacturing data supported expectations the Fed will moveahead with QE3. The central bank already has purchased $2.3 trillion inmortgage-related and government debt in an effort to depressborrowing costs. In June, the Fed extended its current stimulusprogram, under which it is selling shorter-dated securities andbuying longer-dated Treasuries. Investors are also nervously considering the prospect of theeconomy hitting a "fiscal cliff" with the scheduled expirationof tax cuts and deep automatic spending cuts early next year. "We look for 10-year yields to rise to 1.7 percent in thethird quarter and 1.9 percent by year end," said Ralph Axel,interest rate strategist at Bank of America Merrill Lynch in NewYork, adding "the main driver would be a partial resolution ofthe fiscal cliff combined with the beginning of a large scale QEprogram in September." Thirty-year Treasury bonds on Monday weretrading 1-12/32 higher in price to yield 2.690 percent, downfrom 2.75 percent late Friday.